The error of their ways, by Ian Mulheirn

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The Chancellor had barely sat down from giving his emergency Budget, when its implications for departmental spending cuts this October became clear. The Social Market Foundation estimated that 34% cuts were on the cards, unless more benefit savings could be found. And soon after, the Chancellor said that cutting the benefit bill remained at the top of the agenda this October, to take the heat off departments.

But how to do it without politically unacceptable levels of pain, let alone while simultaneously funding Iain Duncan Smith’s bold benefit reform plans? The government has a strategy: a key part of the answer is cutting £5.2bn of fraud and error in the benefit system. The problem is that success here might perversely end up costing the exchequer more.

The £5.2bn lost in fraud and error each year can be split roughly evenly three ways. A third is down to official error, a third due to claimant error and the remainder driven by claimant fraud.

On the fraud front the prime minister yesterday announced plans to deploy credit rating firms to help track criminals down. Despite the din this idea has created, it’s an approach that’s already taken by the Department for Work and Pensions in detecting Housing Benefit fraud – why not take it further?

But even the best fraud-fighting regime isn’t going to make much of a dent in what’s already a pretty internationally competitive level of benefit leakage according to the National Audit Office.

So can anything be done about the other side of the problem: honest error by claimants and officials? Well, yes. Here Duncan Smith’s plans to overhaul the Byzantine benefits system could dramatically reduce the scope for errors, by simplifying the system so that claimants and officials better understand it.

Not only that, but linking DWP benefits to Revenue & Customs income data could reduce the wide range of things that can go wrong when benefit levels get determined. Simplification could substantially cut erroneous payments.

But the problem is that it won’t save the exchequer any money. HMRC and DWP estimate that unclaimed benefit and tax credit entitlements each year run to some £16bn each year, with cash take-up rates running at about 80%. One of the major deterrents for would-be claimants is the complexity of the system, which leaves many concluding that it’s not worth the effort. A simplification reform that was good enough to cut error payments by a couple of billion pounds is very likely to lead to an (at least) offsetting increase in benefit claims.

It’s unfortunate that the Treasury might view as undesirable the idea of cutting fraud and helping people to claim money to which they are entitled. But with Britain’s yawning deficit, good policies and saving money can sometimes make uneasy bedfellows.

Ian Mulheirn is director of the Social Market Foundation

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